MADRID, Oct 26 (Reuters) - Costs from an IT outage at its British bank TSB hit Sabadell’s third quarter earnings on Friday, but shares in the Spanish banking group rose as it exceeded forecasts.

Sabadell said its its third-quarter net profit had fallen 37 percent after a botched migration of TSB’s systems in April prompted a regulatory investigation and the exit of its CEO.

The Spanish bank reported net attributable profit for the quarter of 127 million euros ($145 million), against analyst forecasts of 123 million euros, lifting its shares by 4.9 percent to 1.0835 euros at 0824 GMT.

“Core revenues came in 4 percent above our estimates, with strong growth across net interest income and fees. This was driven by a stronger than expected loan growth in Spain, particularly in the large corporate and retail mortgage segments,” Goldman Sachs said in a note.

Spanish rival Caixabank reported a decline of 27.6 percent in third-quarter net profit to 470 million euros, after one-off losses due to a stake sale in Repsol, with its shares largely flat in early trading.

Sabadell said the extraordinary costs relating to the TSB outage included an increase in interest rates on its premium account, impacted commissions and fraud losses.

NET INTEREST INCOME IMPROVING

The latest TSB charge of 88 million euros relating to the IT outage comes on top of an extraordinary charge of 203 million euros taken by Sabadell in the second quarter.

Sabadell also said it expected a final net one-off charge of 30 million euros in the fourth quarter, taking the total costs related to the TSB IT migration to 321 million euros.

The bank’s handling of the crisis tarnished its reputation just as it tried to win more market share in Britain and offset a squeeze in margins in its Spanish home market as a result of ultra low interest rates in the euro zone.

In the latest quarter, Sabadell’s net interest income, a measure of earnings on loans minus deposit costs, was 932.6 million, down 0.9 percent from a year ago due to pressure from low interest rates. However, this was up 3.8 percent against the previous quarter on lower funding costs.

Sabadell continued to reduce its non-performing assets by 538 million euros in the quarter at a time when the European Central Bank is urging lenders to remove these toxic assets from their balance sheets. ($1 = 0.8787 euros) (Reporting by Jesús Aguado; editing by Sonya Dowsett/David Evans/Alexander Smith)